A long-awaited report compiled by former International Monetary Fund staffers brought the Puerto Rican debt crisis back into the spotlight.
The report concluded that the U.S. commonwealth has lost the ability to fund itself through public debt markets, while pointing to what the authors described as “a decade of stagnation, outmigration and debt.”

Although the Puerto Rican debt crisis is no secret to residents of the island, the governor’s statement essentially was the first official opening for a renegotiation of the debt, said economist Carlos Soto-Santoni, president of Nexos Económicos, a Puerto Rico-based consulting firm, and deputy adviser for former Governor Rafael Hernández Colón’s administration.

But the problem is that, as per the U.S. constitution, Puerto Rico cannot file for Chapter 9 bankruptcy, like Detroit did, and neither can its public corporations and local agencies, Soto-Santoni added.

So the governor is basically seeking a negotiated agreement with bondholders for a postponement of payments on the debt for a number of years.

But U.S. investors would actually have much more to lose in a potential Puerto Rican default than in a Greek default. The reason is that Puerto Rico’s bonds are trading in the U.S. municipal bond market, while the vast majority of Greek debt is in the hands of the International Monetary Fund, the European Central Bank and eurozone countries.

“[According] to most recent estimates about 60% of [Puerto Rico’s] bonds are owned by traditional municipal bond investors and the rest is in the hands of hedge funds and other crossover investors.”
Daniel Hanson, an analyst at Height Securities, LLC
Out of about $350 billion in Greek debt outstanding, only around $14 billion is owed to U.S. banks.

Conversely, in Puerto Rico’s case, the debt is all in U.S. holdings, totaling about $72 billion.

“Exact numbers are hard to come across, because hedge funds do not have the same disclosure obligations as traditional muni-bond owners. But according to most recent estimates about 60% of the island’s bonds are owned by traditional municipal bond investors and the rest is in the hands of hedge funds and other crossover investors,” said Daniel Hanson, an analyst at Height Securities, LLC.

Puerto Rico benefited from being a U.S. territory, particularly because it issues bonds in the U.S. municipal market that are tax exempt, which made them more attractive to investors. But that led to overborrowing that made the debt balloon to unsustainable levels.

The crisis persists, despite the fact that lawmakers — just like in Greece — have had to pass a series of unpopular measures, including two rounds of pension cuts, $1 billion in new taxes, a hike in water rates and sharp reductions in the education budget.

Puerto Rico’s problems are uncannily similar to Greece’s, except that its woes are the U.S.’s problem.